Chapter 5 -Designing Organizational Structure: Authority and Control

To protect stakeholders’ goals and interests, managers must continually analyse and redesign an
organization’s structure so that it most effectively controls people and other resources.

Authority: It is the power to hold people accountable for their actions and to directly influence what
they do and how they do it.

Hierarchy: An organization’s hierarchy begins to emerge when managers find it more and more
difficult to coordinate and motivate employees effectively.

To Coordinate and motivate its employees effectively, and to improve its own ability to control the
people, an organization does two things
(1) It increases the number of managers it uses to monitor, evaluate, and reward employees
(2) it increases the number of levels in its managerial hierarchy so that the hierarchy of
authority becomes taller over time.

Increasing both the number of managers and the levels of management increases vertical
differentiation and gives the organization direct face-to-face control over its members. Managers
personally control their subordinates.

Moreover, when managers personally supervise subordinates, they lead by example and in this
way can help subordinates develop and increase their personal management skills.

Tall organization: An organization in which the hierarchy has many levels relative to the size of the
organization.

Flat organization: An organization that has few levels in its hierarchy relative to its size.

Large organizations do not increase the numbers of managers at each level. Most organizations
have a pyramid-like structure and fewer and fewer managers at each level rather than a bloated
structure. Research suggests that the increase in the size of the managerial component in an
organization is less than proportional to the increase in size of the organization as it grows.
Why do organizations seem to actively restrain the increase in the number of managers,
and hierarchical levels as they grow and differentiate? The answer is that many significant
problems arise as the organizational hierarchy becomes taller and taller.

Some of the Problems in Tall Organizations:

1. COMMUNICATION PROBLEMS: Having too many hierarchical levels may hinder communication.
Decision making slows, and the slowdown hurts the performance of organizations. Another significant
communication problem is distortion.

2. MOTIVATION PROBLEMS: As the number of levels in the hierarchy increases, the relative difference
in the authority possessed by managers at each level decreases, as does their area of responsibility.
Also, when a hierarchy has many levels, it is easy for managers to pass the buck and evade
responsibility by shifting this responsibility to the manager above them.

3. BUREAUCRATIC COSTS: Managers cost money. The greater the number of managers and hierarchical
levels, the greater the bureaucratic costs—that is, the costs associated with running and operating an
organization.

When an organization matures, its structure is likely to be streamlined to improve decision making
and reduce costs.
Managers should base the decision to employ an extra manager on the difference between the value
added by the last manager employed and the cost of the last manager employed.

A general principle for designing a hierarchy is the principle of minimum chain of command.

Principle of minimum chain of command: An organization should choose the minimum number of
hierarchical levels consistent with its goals and the environment in which it operates.

Span of Control: The number of subordinates each manager directly manages.

If the span is too wide, the manager loses control over subordinates. In general, a manager’s ability
to supervise and control subordinates’ behaviour directly is limited by two factors: the complexity
and the interrelatedness of subordinates’ tasks.
When subordinates’ tasks are complex and dissimilar, a manager’s span of control needs to be small.
If tasks are routine and similar so that all subordinates perform the same task, the
span of control can be widened.

Control: When there are limits on the usefulness of direct, personal supervision by managers,
organizations have to find other ways to control their activities. Some of the ways are as follows:

a. Horizontal Differentiation: Horizontal differentiation leads to the emergence of specialized subunits

—functions or divisions. An organization divided into subunits has many different hierarchies, not just
one. Each distinct division, function, or a department inside a function has separate hierarchies.
Horizontal differentiation is the second principal way in which an organization retains control over
employees when it cannot increase the number of levels in the organizational hierarchy divisions.

b. Centralization (Removing Centralization): When authority is decentralized, the authority to make

significant decisions is delegated to people throughout the hierarchy, not concentrated at the top.
The delegation of authority to lower-level managers reduces the monitoring burden on top managers
and reduces the need for “managers to monitor managers.”

c. Standardization: Managers can also gain control over employees by standardizing their behaviour to
make their actions predictable. The use of standardization reduces the need for personal control by
managers and the need to add levels in the hierarchy because rules and SOPs substitute for direct
supervision and face-to-face contact.

Bureaucracy:
A bureaucracy is a form of organizational structure in which people can be held accountable for their
actions because they are required to act in accordance with well-specified and agreed-upon rules
and standard operating procedures.

Role conflict:
The state of opposition that occurs when two or more people have different views of what another
person should do and, as a result, make conflicting demands on the person.

Role ambiguity
The uncertainty that occurs for a person whose tasks or authority are not clearly defined.
SUMMARY:

Not Taught in class, but present in book:

THE PARKINSON’S LAW PROBLEM: Parkinson, a former British civil servant, discovered that from
1914 to 1928 the number of ships in operation in the British Navy decreased by 68%; but the number
of dockyard officials responsible for maintaining the fleet had increased by 40% and the number of
top navy officers in London—the officials responsible for managing the fleet—had increased by 79%!

Why? - The Parkinson’s law - Work expands to fill the time available
The two principles given by Parkinson,
(1) “An official wants to multiply subordinates, not rivals,” and
(2) “Officials make work for one another.
Managers value their rank, grade, or status in the hierarchy. The fewer managers at their hierarchical
level and the greater the number of managers below them, the larger is their “empire” and the higher
their status. Not surprisingly then, managers seek to increase the number of their subordinates. In
turn, these subordinates realize the status advantages of having subordinates, so they try to increase
the number of their subordinates, causing the hierarchy to become taller and taller. More managers
lead to more work.